The cost of air pollution

15 maggio 2019

Arnaud Langlois

Portfolio Manager

Governments worldwide have put in place substantial measures aimed at curbing toxic emissions. The ramifications of the matter are not necessarily well understood or properly priced-in, presenting a number of investment opportunities.

In October 2018, the World Health Organisation (WHO) launched a new global campaign to push governments and stakeholders around the world to take action against air pollution. There are 4.2 million deaths every year as a result of exposure to ambient air pollution, and 91% of the world’s population lives in places where air quality falls below WHO guideline limits. In Europe the cost of air pollution was estimated at USD 1.6 trillion every year due to early deaths and disease

Governments of most advanced nations have already put in place considerable regulation and substantial measures aimed at curbing toxic emissions. A regulatory crackdown on the root causes of air pollution will inevitably create winners and losers across a wide variety of sectors

The EU has been leading the world in terms of emission standards for light and heavy duty vehicles

There are three pillars of regulation which will have the most substantial impact on global business: The EU’s emission control legislation for light and heavy duty vehicles; IMO 2020; and the Blue Sky China policy.

The EU has been leading the world in terms of emission standards for light and heavy duty vehicles. The auto and truck catalysts industry in particular likely to continue to benefit from a major tightening of regulation in the years ahead. Diesel cars are losing share to gasoline cars and electric vehicles but the market is attributing close to zero value to the European light-duty diesel business and ignoring much of the hidden value offered by the research and development-driven fuel cell and cathode material operations.

The International Maritime Organization (IMO) decided in 2008 that the sulphur content of ships’ fuel should be reduced from 3.5% to 0.5% from 1 January 2020, onwards. There are implications across a large number of sectors with relatively clear investment implications – many of which have yet to play out.

A regulatory crackdown on the root causes of air pollution will inevitably create winners and losers.

IMO 2020 will be a game changer for refiners. Shipping companies are most likely to switch from High Sulphur Fuel Oil (HSFO) to diesel which will lead to lower HSFO prices and lead to a squeeze in diesel prices, given limited production capacity available. Complex refiners who can handle the switch and have ample diesel capacity should benefit. The heavy oil discount to light oil is also expected to widen as a consequence.

The shipping industry is likely to experience a substantial increase in operating cost – which will have to be passed on to customers, with some implications for commodity costs. In addition, the jet fuel market is likely to tighten too with negative implications for the airline sector, where cost pass-through is less mechanical.

In July 2018, China’s State Council released its 2018-20 Blue Sky plan expanding pollution control to 82 cities across China, representing about 37% of population and c40% of China’s GDP. This far reaching plan builds on a number of measures which started being implemented throughout 2017 within a number of industries and cities. The measures include a national pricing system for carbon emission and the contamination of water, and a the development of a green transport system.

Western observers should have no doubt China will lead in the renewable and green technologies space. China is already the world’s largest market for what it refers to as NEVs (new energy vehicles – plug-in hybrids, battery electric vehicles, fuel cell electric vehicles) with the ambitious penetration target of 12% by 2020.

Investors are broadly aware of the issue of air pollution, given the recurring newsflow. However, the risks and opportunities are not necessarily well understood which may be reflected in the pricing.

important information.

This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, L-1150 Luxembourg, authorized and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended.

Lombard Odier Investment Managers (“LOIM”) is a trade name.

This document is provided for informational purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipients exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. The contents of this document are intended for persons who are sophisticated investment professionals and who are either authorised or regulated to operate in the financial markets or persons who have been vetted by LOIM as having the expertise, experience and knowledge of the investment matters set out in this document and in respect of whom LOIM has received an assurance that they are capable of making their own investment decisions and understanding the risks involved in making investments of the type included in this document or other persons that LOIM has expressly confirmed as being appropriate recipients of this document. If you are not a person falling within the above categories you are kindly asked to either return this document to LOIM or to destroy it and are expressly warned that you must not rely upon its contents or have regard to any of the matters set out in this document in relation to investment matters and must not transmit this document to any other person. This document contains the opinions of LOIM, as at the date of issue. The information and analysis contained herein are based on sources believed to be reliable. However, LOIM does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

Source of the figures: Unless otherwise stated, figures are prepared by LOIM.

Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.

No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent.